Expert Testimony: Several Retirement Systems in Critical Condition, Fiscal Risks to Remain High

BOSTON – The unfunded liabilities of several retirement systems in the state may precipitate a number of local bankruptcies in the next economic crisis, unless managers adopt more fiscally prudent policies, according to testimony given by Pioneer Senior Fellow on Finance Iliya Atanasov Tuesday.

“Defined-benefit pensions and other postemployment benefits for public employees in Massachusetts will cast a growing shadow on the fiscal health of the commonwealth for the foreseeable future,” Atanasov said in prepared remarks at a public hearing before the legislature’s Joint Committee on Public Service.

State regulators are steering the state’s 105 pension boards to decrease gradually the rates of return used to discount their liabilities and determine their annual required contributions. A lower discount rate leads to a higher estimate of the unfunded liability and a greater required contribution from taxpayers.

New rules by the Governmental Accounting Standards Board (GASB) coming into force in 2014 will likely lower these rates even further, inducing more pressure to increase contributions well over what is planned in current funding schedules. The accounting changes will have the greatest negative impact on the systems in worst condition.

Meanwhile, retirement boards cannot be complacent about near-record returns in 2012 and 2013. The persistent high leverage in the economy increases the probability that the next recession will be severe, leading to greater potential pension fund losses. During the last financial crisis, investment losses impaired pension funds’ ability to meet their obligations, forcing the state to push out its deadline for full funding from 2025 to 2040.

In contrast with public pensions, Massachusetts statutes do not require government entities to set aside money to cover retiree healthcare costs before they come due. Thus, retiree healthcare liabilities across the state are nearly completely unfunded. Current GASB rules require that unpaid contributions be reflected as a liability onto communities’ balance sheets, which may lead to lower credit ratings and higher borrowing costs.

These “major policy concerns militate forcefully against a sustainable decline in the size of unfunded liabilities for retiree health care and pensions,” summed up Atanasov for the panel. As a result, communities that do not act to control costs and protect pension funds’ investments will face an ever larger drain on their budgets in the coming years, jeopardizing their ability to provide basic services such as education, public safety and infrastructure.

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Pioneer Institute is an independent, non-partisan, privately funded research organization that seeks to improve the quality of life in Massachusetts through civic discourse and intellectually rigorous, data-driven public policy solutions based on free market principles, individual liberty and responsibility, and the ideal of effective, limited and accountable government.